Accounting Understanding and Practice 4th Edition Leiwy Test Bank

Accounting Understanding and
Practice 4th Edition Leiwy Test Bank

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Accounting Understanding and Practice 4th Edition Leiwy Test Bank
c2
Student: ___________________________________________________________________________
1. Profit = revenue + expenses

True False
2. Gross profit is the difference between sales and the cost of goods sold
True False
3. Revenue is the amount received in cash during an accounting period

True False
4. Expenses are the amount paid out in cash during an accounting period
True False
5. Depreciation is not a process of valuing assets

True False
6. Which version of profit is used as the basis for determining the amount of dividend paid to shareholders?
A. Gross profit
B. Profit after taxation
C. Profit before taxation
D. Operating profit
7. Operating profit is:

A. Sales - cost of sales + operating expenses
B. Sales + cost of sales + operating expenses
C. Sales - cost of sales - operating expenses
D. Sales + cost of sales - operating expenses
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8. Profit before tax:
A. Operating profit + interest receivable - interest payable
B. Operating profit + interest receivable + interest payable
C. Operating profit - interest receivable - interest payable
D. Operating profit - tax
9. Which of the following statements is false?

A. The "equity" component of the statement of financial position is increased by the amount of profit earned
during the year
B. The "equity" component of the statement of financial position is decreased by the amount of profit earned
during the year
C. The "equity" component of the statement of financial position is reduced by the amount of dividend to be
paid for the year
D. The "equity" component of the statement of financial position may change as the result of a revaluation of
assets
10. Revenue is:

A. The amount received from borrowing
B. The amount of cash received from sales
C. The amount of cash received from sales and the disposals of fixed assets
D. The amount of sales that have been made during a period
11. If opening stock is £2,000, purchases for the year £12,000 and closing inventory £3,000, what is the cost of
goods sold?
A. £13,000
B. £7,000
C. £11,000
D. £17,000
12. If opening stock is £3,000, purchases for the year £15,000 and the cost of goods sold is £14,000, what is
the value of closing stock?
A. £2,000
B. £4,000
C. £3,000
D. £5,000
A. A depreciation expense is not paid out in cash
B. Depreciation is not a process for valuing assets
C. A depreciation expense is paid out in cash
D. A provision for depreciation is a bookkeeping entry, not an allocation of cash
14. If a company buys a machine for £12,000 with an estimated useful life of 4 years and a residual value of
£4,000, what is the annual depreciation charge if calculated on a straight line basis?
A. £2,000
B. £4,000
C. £1,000
D. £3,000
15. If a company purchases a machine for £60,000 and charges depreciation at 10% on a diminishing balance
basis, what is the depreciation charge in the forth year?
A. £5,042
B. £4,374
C. £6,000
D. £4,860
16. Which of the following statements is correct?

A. Capital expenditure appears on the income statement, not the statement of financial position
B. Revenue expenditure appears on the income statement, not the statement of financial position
C. Revenue expenditure does not appear on the income statement
D. Capital expenditure is not associated with depreciation
17. If opening stock for the year is £8,000, closing stock £5,000 and cost of goods sold £19,000, what is the
value of purchases for the year?
A. £6,000
B. £9,000
C. £16,000
D. £3,000
18. If purchases for the year are £18,250, closing stock £7,275 and cost of goods sold £17,525, what was the
opening stock?
A. £6,500
B. £7,950
C. £28,550
D. £7,225
A. The distinction between capital expenditure and revenue expenditure is always clear
B. Sometimes the distinction between capital expenditure and revenue expenditure is not clear
C. Buying a new car is revenue expenditure
D. Statements B and C are both correct

A. Buying new premises is a revenue expenditure
B. Buying a new car is capital expenditure
C. The cost of using a car is a capital expenditure
D. Statements A and B are both correct
21. Which of the following are ways in which managers can manipulate the income statement in order to show
a higher profit?
A. Bringing forward the recognition of sales
B. Overstate closing inventory
C. Make repairs and maintenance look like capital expenditure
D. All of the above
22. In a company's group accounts, the part of the groups profits that belongs to shareholders outside the group
(for example, shareholders of a subsidiary) is known as:
A. Dividends receivable
B. Minority interest
C. Exceptional item
D. Segmental disclosure
23. The part of a company's group accounts that reports income from a small investment in another company,
of which it has little influence, is known as:
C. Exceptional item
24. If the cost of goods sold was £8,000 for goods which eventually sold for £20,000, what is the gross profit
ratio?
A. 40%
B. 60%
C. 150%
D. 250%
25. If the cost of goods sold was £8,000 for goods which eventually sold for £20,000, what is mark-up?
A. 40%
B. 60%
C. 150%
D. 250%
26. A company made the following transactions last year:
A. Operating Profit is £32,000

B. Operating Profit is £19,000
C. Operating Profit is £11,000
D. Operating Profit is £27,000
27. Which of the following statements is correct? For a business that buys raw materials and manufactures a
product:
A. “Revenue” or "Turnover" or "Sales" is all money that comes into the business, including items such as bank
interest received.
B. “Revenue” or “Turnover” or “Sales” is money that is left over once the cost of the raw materials is taken
off.
C. “Revenue” or “Turnover” or “Sales” is the money that has actually been received from people buying
goods.
D. “Revenue” or “Turnover” or “Sales” is the sales value of the goods that have been sold in the financial year.
28. A company has bought, amongst other things, the following items over the last 12 months:
Which of the following statements is correct?

A. The Vehicle is Capital Expenditure. The Insurance, Stapler and Raw Materials are revenue expenditure.
B. The Vehicle and Insurance are Capital Expenditure. The Stapler and Raw Materials are revenue
expenditure.
C. The Vehicle, Insurance and Stapler are all Capital Expenditure. The Raw Materials are revenue expenditure.
D. The Vehicle, Insurance and Raw Materials are all Capital Expenditure. The Stapler is revenue expenditure.
29. A company buys a new piece of machinery for £55,000 cash. It is expected to last for 8 years and will have
a scrap value of £7,000 The company uses straight line depreciation
A. In the year of purchase, there is a cash movement of £55,000 and a depreciation charge and therefore a
reduction in profit of £6,000.
B. In the year of purchase, there is a cash movement of £49,000 which is £55,000 paid for the machine and
£6,000 depreciation charge.
C. In the year of purchase, there is a cash movement of £6,875 which is the depreciation charge.
D. In the year of purchase, there is a net cash movement of £48,125. This is the £55,000 paid for the machine
and £6,875 depreciation charge.
30. A company buys 500 units of stock at a cost of £22 per unit. During the year, it sells 450 units at a price of
£30 per unit. What is the “cost of goods sold” on the Income Statement?
A. £11,000
B. £9,900
C. £13,500
D. £3,600
31. A company buys in a unit at a cost of £2 per unit. The selling price is £3 per unit. Which of the following
statements is correct?
A. Mark up is 67%; Margin is 150%.
B. Mark up is 150%; Margin is 67%
C. Mark-up is 50%; Margin is 33%
D. Mark-up is 33%; Margin is 50%
c2 Key
1. Profit = revenue + expenses

FALSE
Leiwy - Chapter 02 #1
Level of difficulty - Easy
2. Gross profit is the difference between sales and the cost of goods sold
TRUE
3. Revenue is the amount received in cash during an accounting period

FALSE
4. Expenses are the amount paid out in cash during an accounting period
FALSE
5. Depreciation is not a process of valuing assets

TRUE
6. Which version of profit is used as the basis for determining the amount of dividend paid to shareholders?
A. Gross profit
B. Profit after taxation
C. Profit before taxation
D. Operating profit
Level of difficulty - Medium
7. Operating profit is:

A. Sales - cost of sales + operating expenses
B. Sales + cost of sales + operating expenses
C. Sales - cost of sales - operating expenses
D. Sales + cost of sales - operating expenses
8. Profit before tax:

A. Operating profit + interest receivable - interest payable
B. Operating profit + interest receivable + interest payable
C. Operating profit - interest receivable - interest payable
D. Operating profit - tax

A. The "equity" component of the statement of financial position is increased by the amount of profit earned
during the year
B. The "equity" component of the statement of financial position is decreased by the amount of profit earned
during the year
C. The "equity" component of the statement of financial position is reduced by the amount of dividend to be
paid for the year
D. The "equity" component of the statement of financial position may change as the result of a revaluation of
assets
10. Revenue is:
A. The amount received from borrowing
B. The amount of cash received from sales
C. The amount of cash received from sales and the disposals of fixed assets
D. The amount of sales that have been made during a period

11. If opening stock is £2,000, purchases for the year £12,000 and closing inventory £3,000, what is the cost of
goods sold?
A. £13,000
B. £7,000
C. £11,000
D. £17,000

12. If opening stock is £3,000, purchases for the year £15,000 and the cost of goods sold is £14,000, what is
the value of closing stock?
A. £2,000
B. £4,000
C. £3,000
D. £5,000


A. A depreciation expense is not paid out in cash
B. Depreciation is not a process for valuing assets
C. A depreciation expense is paid out in cash
D. A provision for depreciation is a bookkeeping entry, not an allocation of cash

14. If a company buys a machine for £12,000 with an estimated useful life of 4 years and a residual value of
£4,000, what is the annual depreciation charge if calculated on a straight line basis?
A. £2,000
B. £4,000
C. £1,000
D. £3,000

15. If a company purchases a machine for £60,000 and charges depreciation at 10% on a diminishing balance
basis, what is the depreciation charge in the forth year?
A. £5,042
B. £4,374
C. £6,000
D. £4,860


A. Capital expenditure appears on the income statement, not the statement of financial position
B. Revenue expenditure appears on the income statement, not the statement of financial position
C. Revenue expenditure does not appear on the income statement
D. Capital expenditure is not associated with depreciation

17. If opening stock for the year is £8,000, closing stock £5,000 and cost of goods sold £19,000, what is the
value of purchases for the year?
A. £6,000
B. £9,000
C. £16,000
D. £3,000

Level of difficutly - Hard
18. If purchases for the year are £18,250, closing stock £7,275 and cost of goods sold £17,525, what was the
opening stock?
A. £6,500
B. £7,950
C. £28,550
D. £7,225


A. The distinction between capital expenditure and revenue expenditure is always clear
B. Sometimes the distinction between capital expenditure and revenue expenditure is not clear
C. Buying a new car is revenue expenditure
D. Statements B and C are both correct


A. Buying new premises is a revenue expenditure
B. Buying a new car is capital expenditure
C. The cost of using a car is a capital expenditure
D. Statements A and B are both correct

21. Which of the following are ways in which managers can manipulate the income statement in order to show
a higher profit?
A. Bringing forward the recognition of sales
B. Overstate closing inventory
C. Make repairs and maintenance look like capital expenditure
D. All of the above

22. In a company's group accounts, the part of the groups profits that belongs to shareholders outside the group
(for example, shareholders of a subsidiary) is known as:
C. Exceptional item

23. The part of a company's group accounts that reports income from a small investment in another company,
of which it has little influence, is known as:
C. Exceptional item

24. If the cost of goods sold was £8,000 for goods which eventually sold for £20,000, what is the gross profit
ratio?
A. 40%
B. 60%
C. 150%
D. 250%

25. If the cost of goods sold was £8,000 for goods which eventually sold for £20,000, what is mark-up?
A. 40%
B. 60%
C. 150%
D. 250%

26. A company made the following transactions last year:
A. Operating Profit is £32,000

B. Operating Profit is £19,000
C. Operating Profit is £11,000
D. Operating Profit is £27,000
Operating Profit, or “net profit”, is the profit left after expenses have been paid:
Sales £40,000
Cost of Sales (£8,000)
GROSS PROFIT £32,000
Less Expenses:
Wages £12,000
Rent £6,000
Heat, Light & Power £3,000
Total Expenses (£21,000)
Net Profit (Operating Profit) £11,000

27. Which of the following statements is correct? For a business that buys raw materials and manufactures a
product:
A. “Revenue” or "Turnover" or "Sales" is all money that comes into the business, including items such as bank
interest received.
B. “Revenue” or “Turnover” or “Sales” is money that is left over once the cost of the raw materials is taken
off.
C. “Revenue” or “Turnover” or “Sales” is the money that has actually been received from people buying
goods.
D. “Revenue” or “Turnover” or “Sales” is the sales value of the goods that have been sold in the financial year.
Revenue (Turnover or Sales) is the sale of the product (or provision of the service) that is the main feature of
the business. Money from other sources of income, such as bank interest received, is NOT part of “Revenue”.
Most businesses sell items on credit. The SALE is the important feature – not when the money is received.

28. A company has bought, amongst other things, the following items over the last 12 months:
Which of the following statements is correct?

A. The Vehicle is Capital Expenditure. The Insurance, Stapler and Raw Materials are revenue expenditure.
B. The Vehicle and Insurance are Capital Expenditure. The Stapler and Raw Materials are revenue
expenditure.
C. The Vehicle, Insurance and Stapler are all Capital Expenditure. The Raw Materials are revenue expenditure.
D. The Vehicle, Insurance and Raw Materials are all Capital Expenditure. The Stapler is revenue expenditure.
Revenue Expenditure is incurred in the day to day running of the business. Capital expenditure is when a
non-current asset is purchased. These items are relatively expensive, and last longer that 1 year. Hence the
vehicle is Capital Expenditure. The van will sit on the Statement of Financial Position, and depreciation will be
charged to the Income Statement over several years. The insurance lasts only 1 year, and so is revenue. A
stapler is a relatively low cost item; even though it may last more than 12 months! And raw materials are used
for generating revenue.

29. A company buys a new piece of machinery for £55,000 cash. It is expected to last for 8 years and will have
a scrap value of £7,000 The company uses straight line depreciation
A. In the year of purchase, there is a cash movement of £55,000 and a depreciation charge and therefore a
reduction in profit of £6,000.
B. In the year of purchase, there is a cash movement of £49,000 which is £55,000 paid for the machine and
£6,000 depreciation charge.
C. In the year of purchase, there is a cash movement of £6,875 which is the depreciation charge.
D. In the year of purchase, there is a net cash movement of £48,125. This is the £55,000 paid for the machine
and £6,875 depreciation charge.
Depreciation is NOT the same as cash on a year by year basis. The cost of the equipment over the 8 years is
£55,000 less the scrap value of £7,000 = £48,000 Therefore the annual depreciation, on a straight line basis, is
£6,000 per year. THIS is the value that affects profit. The CASHFLOW occurs when the machinery is
purchased, and when it is sold.

30. A company buys 500 units of stock at a cost of £22 per unit. During the year, it sells 450 units at a price of
£30 per unit. What is the “cost of goods sold” on the Income Statement?
A. £11,000
B. £9,900
C. £13,500
D. £3,600
“Cost of goods sold” must be the cost of the goods SOLD! This is due to the “accruals” or “matching”
concept. Using the wrong figure will affect profit, and therefore tax! In this example – and there are several
ways to calculate the correct answer – only include what was actually SOLD. Eg: 450 units x £22 = £9,900 A
includes unsold units. C & D are revenue / profit calculations.

31. A company buys in a unit at a cost of £2 per unit. The selling price is £3 per unit. Which of the following
statements is correct?
A. Mark up is 67%; Margin is 150%.
B. Mark up is 150%; Margin is 67%
C. Mark-up is 50%; Margin is 33%
D. Mark-up is 33%; Margin is 50%
Mark-up and Margin are often confused. Mark-UP is the amount added on to the COST. In this example, £1 is
added which is 50% of the £2 cost Margin is the amount within the SELLING PRICE. In this example, the
“profit” of £1 is 33% of the selling price.

Accounting Understanding and Practice 4th Edition Leiwy Test Bank
c2 Summary
Category # of Questions
Leiwy - Chapter 02 62
Level of difficulty - Easy 12
Level of difficulty - Medium 15
Level of difficutly - Hard 4
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Accounting Understanding and

Practice 4th Edition Leiwy Test Bank

1. Profit = revenue + expenses

3. Revenue is the amount received in cash during an accounting period

5. Depreciation is not a process of valuing assets

7. Operating profit is:

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9. Which of the following statements is false?

10. Revenue is:

16. Which of the following statements is correct?

20. Which of the following statements is correct?

26. A company made the following transactions last year:

A. Operating Profit is £32,000

Which of the following statements is correct?

1. Profit = revenue + expenses

3. Revenue is the amount received in cash during an accounting period

5. Depreciation is not a process of valuing assets

7. Operating profit is:

8. Profit before tax:

9. Which of the following statements is false?

Leiwy - Chapter 02 #10

Leiwy - Chapter 02 #11

Leiwy - Chapter 02 #12

13. Which of the following statements is false?

Leiwy - Chapter 02 #13

Leiwy - Chapter 02 #14

Leiwy - Chapter 02 #15

16. Which of the following statements is correct?

Leiwy - Chapter 02 #16

Leiwy - Chapter 02 #17

Leiwy - Chapter 02 #18

19. Which of the following statements is correct?

Leiwy - Chapter 02 #19

20. Which of the following statements is correct?

Leiwy - Chapter 02 #20

Leiwy - Chapter 02 #21

Leiwy - Chapter 02 #22

Leiwy - Chapter 02 #23

Leiwy - Chapter 02 #24

Leiwy - Chapter 02 #25

A. Operating Profit is £32,000

Leiwy - Chapter 02 #26

Leiwy - Chapter 02 #27

Which of the following statements is correct?

Leiwy - Chapter 02 #28

Leiwy - Chapter 02 #29

Leiwy - Chapter 02 #30

Leiwy - Chapter 02 #31

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